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Devaluation Is Putin's Best Friend

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website
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Russia's central bank lowered its key interest rate from 17 percent to 15 percent today in a move few had predicted, causing the ruble to dip. This sequence of events shows the Kremlin still sees devaluation as its best friend and is eager to help banks and companies weather the crisis.

As for the Russian people, who face double-digit inflation as a result, they are just expected to be patient while their government does its best to deal with a Western attack on Mother Russia.

The central bank had hiked the rate to 17 percent from 10.5 percent on December 16, as the ruble more or less tracked the free-falling price of oil. The move failed to stabilize the exchange rate, however, because banks and businesses saw investing in ruble assets as too risky almost regardless of offered yields and the independence of the central bank itself from Kremlin influence was increasingly in question. 

The central bank and the government then had to stabilize the exchange rate by other means, such as dipping into international reserves -- $33.4 billion in December alone -- and asking large companies to sell foreign currency. This worked until the end of December, calming Russians a little before the 10-day New Year holiday break that invariably paralyzes the country. Then the ruble resumed its slide, dropping even lower against the U.S. dollar by the end of January than it had been at the time of the December rate hike:


Meanwhile, the central bank's 17 percent policy rate remained, and it made no one happy. Banks and companies said it was stifling all lending activity. On Jan. 13, former Prime Minister Yevgeny Primakov, one of the most respected figures among Russian conservatives, particularly the military-industrial lobby, delivered a major speech in which he sharply criticized the central bank. "Financial stability should serve economic growth, but in practice this is not happening because lending to the real sector of the economy is not assured," Primakov said. "The rise of the central bank's key rate to 17 percent can be described as a surgical measure. But such surgery must fall within a strictly limited time frame."

This was just the visible manifestation of the ferocious lobbying by Russian business to have the rate lowered. It was only a matter of time before the central bank would react; the bank's high lending rate wasn't serving a useful purpose anyway, because the ruble kept falling. This month it is the world's second worst-performing currency after the Belarussian ruble.

The tricky part was lowering the rate without triggering panic. In its statement justifying the rate cut today, the central bank said it was less worried about inflation than hampering economic growth. Inflation, it said, was almost played out after a short-term burst caused by the ruble devaluation, while lending was slowing down. In this case lower rates would make sense. Currency traders didn't exactly buy the argument, though, which is why the ruble sank against the dollar immediately after the rate announcement:


Perhaps, however, the central bank doesn't care too much about that. It said in the statement that it estimated 2014 economic growth at 0.6 percent. Chris Weafer, founding partner of Macro-Advisory, a consulting firm for investors into post-Soviet economies, wrote in a recent post that Russia avoided a contraction "because of the positive impact on domestic demand due to the rouble collapse and the block on a lot of imported food. High defense sector spending also contributed to manufacturing sector growth."

In the first six months of 2015, the central bank expects the devaluation to be insufficient to avoid negative growth of 3.2 percent. That may be because it's underestimating the ruble's downside potential. There is no political will in the Kremlin to prop up the currency. As Weafer points out:

The fact that the rouble has been allowed to free-float, despite regular interventions to prevent a complete collapse and uncontrolled crisis with the falling oil price, appears to have a short-term political element as well as a positive effect on import substitution. In rouble terms the surplus for 2014 and the more manageable deficit expected in 2015 means that pensions and most public sector salaries can be indexed to protect President Putin’s core support group from the ravages of double digit inflation.

Even at the current oil price, Russia will still have a healthy current account surplus, which -- so long as reserves aren't used up trying to defend the ruble -- will enable Russia to handle the $105 billion in foreign debt payments due this year. With that and the ruble-based needs of Putin's relatively poor electorate taken care of, all the government has to worry about is preventing a banking crisis and keeping industrial investment from falling too steeply, after a 2.9 percent contraction in 2014. Societe Generale predicts a 6.5 percent year-on-year investment decrease for this year, but lowering the central bank rate should theoretically ameliorate that. So expect more interest rate cuts in the coming months.

The continuing devaluation will only hurt the Russian middle class, which regularly travels overseas and buys a lot of imported goods. These people will just have to lump it as far as the government is concerned. In a recent speech in Davos, First Deputy Prime Minister Igor Shuvalov said:

If a Russian feels any outside pressure at all, he will never give up his leader. Never. And [he'll take] any privations he might face inside the country -- consuming less food, less electricity, I don't know -- some things that we are all used to. If we feel that someone on the outside wants to change out leader and that is not our will, that this is an attempt to influence our will, we will simply be more united than ever.

There are enough people who subscribe to this kind of thinking for Putin to be confident that things will work out fine for him. According to the latest poll by the independent researchers at Levada Center, taken on January 23-26, 55 percent of Russians believe the country is on the right path. It's a drop from the August high of 66 percent, but still a comfortable enough majority.

As for Putin's personal support, it has been frozen at 85 percent for the last three months. Russia's president is surviving sanctions and a decimated oil price just fine.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at

To contact the editor on this story:
Marc Champion at